Static To Dynamic Broadband: How New Billing Methods Will Revolutionize Broadband Service Offerings And Revenues

BY ORI COHEN

In the still early history of broadband delivery, broadband operators are still exploring how to best introduce new services, effectively bill current customers, keep margins steady and add new subscribers, all while turning a profit. These goals have proven difficult due to the current pricing systems and the general billing practices of broadband providers, who most typically operate under a flat rate billing system.

While the adoption rate of broadband Internet access continues to climb, today the majority of the population accesses the Internet through dial-up connections. With broadband penetration less than 25 percent of the total Internet user base in the majority of worldwide markets, industry analysts and insiders often point to operator pricing strategies as a common barrier to widespread adoption of broadband Internet access.

While Forrester Research predicts that the broadband subscriber base will continue to grow at an over 40 percent Compound Annual Growth Rate (CAGR), the same study suggests that monthly revenue per subscriber is predicted to fall at a CAGR of approximately 3.5 percent.

To overcome the challenge of increasing their customer base while protecting margins, broadband providers need to move away from a flat rate pricing model. By establishing the right billing structure based on real usage, broadband providers can generate significant interest from and subsequent acquisition of users who are waiting for broadband prices to come down.

As with any flat rate service, there is a risk of the lower consumption subscribers subsidizing the use of the higher consumption subscribers. The vast majority of user-based services are billed on a consumption basis. For example, airlines charge different rates for different destinations. A flat fee would be prohibitive for local or casual flyers. The same holds true for broadband data services. Casual users are paying for the heaviest users while some subscribers are being priced out of the market altogether.

Research from Cisco Systems shows that 50 percent of total usage on broadband networks is consumed by only five percent of the subscriber base and 95 percent of total usage is attributable to the top 50 percent of users. In most cases, the top subscribers in terms of total bandwidth consumption also represent the most price-elastic consumers, those being remote business users (telecommuters), home office users and small businesses, as opposed to the majority of residential users. With bandwidth and associated routing and switching equipment being arguably the highest operational costs in a broadband network, the monetization of usage makes sense.

In order to fully realize broadband revenue opportunities, service providers need to intimately understand how their customers are using their services. Broadband operators and service providers need to rise above the cost subsidization hurdle caused by a static billing system that inadequately addresses the variations in users' broadband habits. One way of addressing these variations is through offering usage-based services and eventually value-based services.

When moving away from flat-rate billing, complete assurance that usage data is sent to and consumable by a billing system is vital. To ensure profitability, it is critical that operators know what services are being used over their facilities and are able to bill for them. This can be done using a billing platform that provides a clear view into all data in the network, which allows providers to focus on more than simply adding subscribers, but instead focus on adding the "right" subscribers. A number of convergent mediation companies, including Narus, offer various billing solutions that help broadband service providers make their businesses more profitable by collecting and analyzing extremely detailed information about the service usage for each individual customer.

Usage-based and value-based billing create the monetization practice necessary to encourage subscribers to use these services. Usage-based billing systems can be based on raw usage or specific content usage deemed appropriate by the provider. For example, a billing system can be used to set caps on monthly usage in an effort to target only the high end subscribers, where abusers would be billed for an inordinate volume of download or upload traffic. The detailed information gives the broadband provider a tool to address not only abuse from heavy usage for individual users, but also users sharing connections in home or office networks by wired or wireless (802.11x) solutions.

Similarly, basic usage information can be used to generate tiers beyond tiers set on speed or quality of service (QoS) alone. Such tiers can be enhanced with unique pricing for high bandwidth streaming, proprietary content access and "pay-as-you-go" services.

Another and more forward-looking alternative to the flat-rate billing system is value-based billing. While not yet widely adopted by broadband providers, value-based billing provides a truly flexible billing system that further helps attract new consumers and generate revenue. The basic idea behind value-based billing is that broadband consumer cost can be molded to the value the user places on the service. This type of billing provides unlimited and extremely flexible ways to bill consumers. Such billing allows broadband providers to bill according to location (i.e. access from an airport may cost more than local access), time of the day (consumers that do not require full broadband at all times may be willing to pay more for broadband when they need it most) and how the consumer is using the service.

As broadband providers roll out these new billing processes, they will realize many benefits, including:

• Effectively monetizing subscriber usage to secure consistent margins across varying pricing levels;
• Increasing revenue per subscriber;
• Capturing the information required to target service abuse;
• Offering subscriber-focused offerings by targeting subscribers with packages they need;
• Eliminating revenue loss typically associated with usage-based billing services;
• Providing requisite flexibility to support new services and business models as trends change; and
• Opening new markets to price-sensitive subscribers.

In today's fiercely competitive environment, providers need to continually look for ways to increase revenue while decreasing expenses. The key to profitability for broadband providers is to develop and maintain the flexibility to implement new billing plans based on actual subscriber behavior. By doing so, new markets can be opened while effectively monetizing subscriber usage for increased margins. Today, with the introduction of usage- and value-based billing plans, service providers now have the ability to examine what services are being used over their facilities and equally as important, what trends are emerging in subscriber usage. With a clearer view into their networks, broadband service providers will entice new users to their networks and tap into the lost revenue originally created by the flat-rate system.

Ori Cohen is founder and chairman of Narus. Narus telecommunications software empowers the world�s largest carriers to offer differentiated, value-based services, lower delivery costs and enforce business policies. Narus also provides government and law enforcement agencies with the means to lawfully monitor and intercept intelligence from any network for national security purposes. For more information, visit their Web site.